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Market of cheese 3) In order to avoid excess supply the EU decides to introduce a tax T on producers. Which is the value of T such that excess supply is avoided? i)Show the effect of the tax graphically ii)Find the correct value of T

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Market of cheese The portion paid by consumers is simply the difference between the new equilibrium price and the equilibrium price before the intervention, i.e. 5 – 3 = 2 For producer is the difference between the old equilibrium price and the new price that they receive, i.e.: 3 – (5 – 8/3) = 3 – 7/3 = 2/3 Obviously, the sum of the two portion gives us the tax burden, i.e /3 = 8/3

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Market of cheese 5) Finally, evaluate the effect of the intervention in terms of allocative efficiency. Does the intervention improve social welfare? Show it graphically and analytically

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Macroeconomic Equilibrium Two equations with two unknowns: Y = 1,400 – 2,500i -> Goods Market Y = i -> Financial Market We can solve the system of equation to find the value of Y and i that satisfy the equilibrium conditions in both markets.

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Macroeconomic Equilibrium First we solve for i: i = – 2.500i 3.100i = i = We substitute for i in one of the goods market equation: Y = 1,400 – 2,500i Y = 1,400 – 2,500 x Y =

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Increase in public expenditure 2) Using the AS-AD investigate the consequences of a fiscal policy in which public expenditure are increased. Explain the effect in the short period, during the transition, and in the medium period.

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Increase in public expenditure( G ) Initially, let’s assume Y = Y n Then, government reduces G What are the short-period effects on equilibrium prices (P) and quantities (Y)? An what about the medium-period effects? Increase in public expenditure

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Y During the transition -> Y and P In the medium period -> Y A ’’ =Y n =Y A and P A ’’ >P A AS AD P A YnYn A’A’ YA’YA’ PA’PA’ PAPA P A’’ A’’

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Total effects of the intervention: Short period -> Y P Transition -> Y P Medium period -> Y= P This is usually meant when it is argued that expansionary fiscal policy are inflationary in the medium period. This result however is obtained under fairly stringent assumptions. For instance, G does not affect Y n (think of public investments in scientific research) Reduction of public deficit